capitalism and its critique

Capitalism and its critique

S P SETH

Not long ago free market capitalism was supposed to be the pathway for all societies to grow rich eventually.  The collapse of the Soviet Union had clinched the argument decisively in favour of capitalism. All International Monetary Fund (IMF) loans had conditions attached whenever developing countries sought credits to sort out their balance of payments problems. Not surprisingly, most of the time developing countries had these problems, though now some of the ‘sick’ members of the European Union have also been in this situation. The IMF conditions insisted that the troubled countries were to open up their economies, reduce subsidies, practice austerity and so on. In other words, there was one size fits all perfected in the US and the western world. But with the global recession hitting the world in 2008, and the US and much of the western world still grappling with their economic malaise, there are now growing doubts about the efficacy of freewheeling capitalism that is making rich richer and poor, well, they are in the poverty trap.

Another feature of this new crisis of capitalism is that a handful of the world’s rich are now controlling much of the world’s wealth. This was already known in a general sort of way but when Oxfam came out with a report which said that just 85 of the world’s richest control as much wealth as half the world’s population (3.5 billion people), it came as a shock to many. Around the same time, Pope Francis, the spiritual head of the world’s over 1 billion Catholics, was talking about the “tyranny” of capitalism. He said that, “Inequality [it fosters] eventually engenders a violence, which recourse to arms cannot and never will be able to resolve.” Not surprisingly, some critics have called his utterances as “pure Marxism”.

But it is not just Oxfam and Pope Francis talking and highlighting the plight of the world’s forgotten poor, a new book on the subject by a respected economist is creating a bit of a sensation by giving it a certain framework and grounding that cannot be dismissed so easily. In his book, Capital in the Twenty-First Century, the French economist, Thomas Picketty, has sought to look at the phenomena of extreme inequality that is a hallmark of today’s world. His basic argument is that as the rate of return on capital (in the form of corporate profits, dividends etc.) outstrips the rate of growth, this will lead to greater accumulation of inherited wealth among fewer people, thus creating a highly unequal society, as is already happening. And this might see a return to Dickensian levels of poverty of the 19^th century in advanced countries.  And if Picketty is right, the universal prescription of free market capitalism might need to be revised.

His prescription to deal with such a situation is high tax on inherited wealth as well on people with high incomes, and a global tax on capital. Even though his book and its remedies will be highly unpopular with the upper end of the town, he has become quite a celebrity with his incisive analysis based on copious data. Paul Krugman, a Nobel laureate, has called it “an awesome work”. He describes it as “a book that will change both the way we think about society and the way we do economics.” To quote Krugman from his review of the book in the New York Review of Books, “ The big idea [of the book] is that we haven’t just gone back to nineteenth century levels of income inequality, we’re also on a path back to ‘patrimonial capitalism’, in which the commanding heights of the economy are controlled not by talented individuals but by family dynasties.”

A mythology had developed around free market capitalism in the eighties and into the nineties with President Ronald Reagan in the US and Margaret Thatcher in United Kingdom as its chief proponents. As a result, the markets became increasingly unregulated, with low taxes on corporations and high income tax earners, and cheaper borrowing costs. It was touted as a self-evident law of economics to encourage investments and keep economic growth rolling. And it worked with markets flushed with easy money, until the pyramid scheme so cobbled together started to crumble, as banks and financial institutions either bankrupted or came close to it. Which led governments to bale out these institutions with taxpayers’ money.

But its perpetrators, the bank executives and their enablers, went largely scot-free, with few or none charged with criminal neglect and/or complicity. Indeed, they are still drawing huge bonuses, apparently for bringing the world to financial collapse. In the US dream world of capitalism where paupers can rise to become rich, any interference with individual initiative to reach the top is frowned upon. And this has underpinned the excesses of a society where every man and woman can make up their own destiny. And in the lax world of financial capitalism, almost every family was encouraged to buy a house or run a business with easily available borrowed money with almost no questions asked.

This is where a newly minted Senator Elizabeth Warren, regarded as a possible presidential contender, is making some waves. A former Harvard Law School professor, who emerged as a strong critic of Wall Street, sought to take head on this idea that America’s rich are rich and keep getting rich because of their individual creativity and merit. During her congressional campaign in 2011, she said bluntly that, “There is nobody in this country who got rich on his own. Nobody. You built a factory out there? Good for you. But I want to be clear: you moved the goods to market on roads the rest of us [taxpayers] paid for. You hired workers the rest of us paid to educate. You were safe in your factory because of police forces and fire services the rest of us paid for... “  And she added, “Now look, you built the factory and it turned into something terrific, or great idea. God bless. Keep a big hunk of it. But part of the underlying social contract is you take a hunk of that and pay forward for the next kid that comes along.” In other words, “ For capitalism to work, we all need each other.”

To put it in another way, capitalism without a social context and social contract, will deepen inequalities . And if Thomas Picketty is right and capitalism remains an idea and system without a social conscience, the capitalist world might turn into the highly unequal societies depicted by the 19^th century novelists, Jane Austen and Balzac.

Note: This article was first published in the Daily Times.

Contact: sushilpseth@yahoo.com.au